what price will they charge? $_______ How many gallons of water will be produced
ID: 1119043 • Letter: W
Question
what price will they charge? $_______
How many gallons of water will be produced and sold? ____________
How much profit will each of them earn? $_____________
(1 point) If the market for water were perfectly competitive instead of monopolistic,
what price will they charge? $_______
How many gallons of water will be produced and sold? _____________
How much profit will each of them earn? $____________
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c. (1 point) What is the socially efficient quantity of water? ____________
Question 4: Oligopoly (10 points total) Refer to the following scenario and the table below to answer questions a through Imagine a small town in which only two residents, Randy and Alex, own wells that produce safe drinking water. Each week Randy and Alex work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Randy and Alex can pump as much water as they want without cost so that the marginal cost of water equals zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below: Quantity in gallons Total Revenue and Total Profit Price 100 200 10,000 13 16,000 17 18,000 17 16,000 13 10,000 45 35 30 25 900 10 1,100Explanation / Answer
A profit maximizing monopolist in this market in this market for water will produce that level of output at which total revenue is at its maximum.
Total revenue is maximum corresponding to 600 gallons of water at the price of $30 per gallon.
So,
If Randy and Alex operate as a profit-maximizing monopoly in the market for water then -
(i) The price they will charge = $30 per gallon
(ii) The gallons of water produced and sold = 600 gallons
(iii) Profit that each of them will earn = $9,000
If the market for water is perfectly competitive then quantity produced would be such corresponding to which price equals MC.
Marginal cost is $0. So, the quantity corresponding to which price is also $0 is the quantity to be produced in perfectly competitive market. This quantity is 1,200 gallons.
(i) The price they will charge = $0 per gallon
(ii) Gallons of water produced and sold = 1,200 gallons
(iii) Profit that each of them earns = $0
The socially efficient quantity of water is 1,200 gallons.
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